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Make Money Online with Residual Income: the Rule of 25

Updated on February 28, 2014

The Rule of 25


At its core, passive or residual income is money you earn from only doing the work once, and continue to earn without any extra effort. There are many ways to earn an income, what better way than only having to do the job once, and getting paid for it many times over?

The easiest, or most straightforward way to create passive income is with existing dollars. This concept is where retirement savings comes from. You earn and save enough, and hope your funds grow, so at some point you are able to live from a very small part of your savings and the returns.

Below is a simple explanation of the Rule of 25.

1. Determine the amount of income in today's dollars you wish to earn. For examples sake, we will choose $50,000. This number again is in today's dollars, so do not worry about inflation, this is addressed later.

2. Implement the rule of 25. take the $50,000 you want to earn each year and multiply it by 25. In our example this is $1,250,000. your goal is to earn at least a 7% return through the invested portfolio. This is the only variable in the equation. your portfolio will fluctuate, but by earning a minimum of 7%, rest assured you will have at least $50,000 a year to live off of.

3. To sustain your nest egg, and keep up with inflation, do not withdraw more than 4% each year. This is the second part of the rule of 25. Quick math proves 4% multiplied by your nest egg of $1,250,000 is your desired $50,000. The other 3% is reinvested for growth to keep up with inflation.

Any extra return is icing on the cake. 7% is by no means an unrealistic expectation. A conservative and well diversified portfolio should not have any problem achieving and sustaining 7% minimum.

This concept is at the base for the concept of retirement, passive income, and many other applications. there are many ways to reach this goal, but at its core, this is what passive income is meant to do, and this example is the easiest concept to grasp. Earn money, invest money, live off of the returns.

To take it just one step further, though there are many, lets create a simple word problem in an every day scenario. You are 30, and want to retire at 65. That gives you 35 years to build your nest egg, and 35 is a slightly late start. Now lets stick with our 7% return, and compound the interest monthly, how much do you think you would need to save each month to reach that magic $1,250,000? $1,000? $900? $800? NO! You would need to save and invest just under $700 a month to reach that goal. If you started at 25, it would take less than $500!

The old saying goes something like " the best time to plant a tree is 20 years ago, the second best time is today!"

Start early, be consistent, and you WILL reach your goal.

For more information on personal finance, visit my blog at http://www.stewardology.com/blog

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    • beherdtennis profile image
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      beherdtennis 5 years ago from Eagan, MN

      I have a feeling you are not the only one who may have this misconception. I will try to explain. Just because a form of passive income may not last forever or create the same amount of income the entire time does not discount it from being a form of passive income. Again I will revert back to the definition, a form of income(doesn't mention how much or the consistency) that does not require active involvement. If you Google the definition of passive income you will get many variations but the general concept is the same. The main point is you are earning money passively, not actively. i think that is the best example I can give. when you punch in at work, and you work, that is active income, you are only earning income when you are punched in and working. On the other hand, if you are able to earn an income without constantly, or actively doing the work, that is some sort of passive income. there are not any perimeters on the amount or consistency of it.

      Don't get me wrong, I understand your point, that doing absolutely no work and getting paid is not income, because income is defined as exchanging money for a good or service. But the examples you tried to discount are some of the purest forms of passive income. a singer who makes an album would see profit from sales for years, no not the same amount, but they would not have to do any other work. An inventor who sells their invention or agrees to royalties from the sales will not have to create that work again but will be paid for many years to come, no not the same amount or forever, but they will not have to do any more work. A venture capitalist who does research then invests in an idea or business, then receives dividends from their investment will not have to do any work and could very well see dividends roll in for a long time, no not the same about but some form of income. The list goes on and on.

      Passive just means not active or constant. you are right some of the forms of passive income I listed above, like owning a rental property are not as pure a form, but you may have a tenant that has no issue, then once a year you have to paint the walls when they move out, but each month you receive a check for rent without doing anything, that IS passive income. If you put money towards a 401k each paycheck, the reason you do that is in hopes of that money growing, so you have more come retirement age. That IS passive income, because you are not actively working for that money to grow.

      Sorry for being long winded, but I respectfully disagree that passive income does not exist, and I know that there are hundreds of thousands of people who do not lift a finger and receive all of their income from past work that would agree and are living proof that passive income exists.

      I hope this helps, and I can initially understand your apprehension towards the subject, but I think our ideas of the concept may be different to begin with, and that is just fine. But under the way I define passive income, and many financial resources define passive income, it is a great tool and way to earn money.

    • HandControls profile image

      HandControls 5 years ago from Shenzhen, China

      Right but, you write a hubpage and it might make a little money, but overtime the long-tail keywords it's ranking for on Google will slip from the rankings as better webpages are favored above it - unless you start building backlinks or putting in further effort to maintain rankings.

      You write a book then eventually people are going to stop buying it in greater numbers.. so you need to write another book.

      You invest in stock, well that can potentially go down or not rise as much as you thought.

      Owning a rental property takes maintenance, patent rights/royalties are just a one time invention.

      All of these things take effort still, 'passive' income, i.e - doing absolutely no work after the initial input is a fairy tale. There's just not such thing,

    • beherdtennis profile image
      Author

      beherdtennis 5 years ago from Eagan, MN

      If i understand your comment, you mean you do not think there is truly passive income. Well take hub pages for example. you write 1 article 1 time. then you check back a month later not doing any additional work and you have earnings that you did not have to do more work for. Passive income does not mean you never lift a finger and you get paid for it for a long time, it means you complete a task once, and are paid over and over again for it. much like someone who writes a book, or invests in a stock. the opposite is active income, where each hour you work you are paid for that hour, and tomorrow you wake up and do the same thing. I think your core definition of what passive income is might not be in line. there is not really a true, do nothing and get paid for it income, well there is, but its called a trust fund, or having something given to you, or inheritance, but that is not even income. the definition of income is money exchanged for a good or service. there are many forms of passive income, writing a book, selling the patent rights or royalties to an invention, owning a rental property, investments, a lot of insurance is a type of passive income for agents, but that might be stretching it a little. basically its anything you earn without having constant contact or upkeep or effort to maintain. hope this helps!

    • HandControls profile image

      HandControls 5 years ago from Shenzhen, China

      Personally I don't there's ever a truly passive income... you can try to get close, do minimal work.. but truly passive? nope.

    • nicregi profile image

      Reginald Chan 5 years ago from Malaysia

      Very interesting. Thanks for sharing. Like the way to express it but you could improve by putting in some pictures along.

      Thanks!

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